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How Does Risk Management Add Shareholder Value?

Reducing Risk

Risk is the uncertainty associated with future cash flows or earnings. Risk management involves measuring and ultimately reducing this uncertainty. Depending on the source of uncertainty, risk can be reduced through operational or financial decisions.

Key Points

  • The academic view of risk management
  • The value of risk reduction
  • How reduced volatility feeds into the firm valuation equation
  • Relation between standard deviation and beta
  • Firm’s Two-Year Cash Flows With and Without Risk Management
  • Relationship between firm value and changes in earnings volatility
  • The combined effect of risk reduction: sample calculation and simulation
  • Which Firms Benefit From Risk Management

 

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Written by:

expert

Siva Moodley

Xrisk

Director

This article is available as part of an extensive case studies collection: Risk Management Series

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